DELTA MUTUAL, INC.
111 North Branch Street
Sellersville, PA 18960
January 27, 2006
Securities and Exchange Commission
Washington, D.C. 20549
Dear Sir/Madam:
We have received your comment letter dated January 6, 2006. The response
letter of Delta Mutual, Inc. (the "Company") to these comments is attached
hereto.
As President of the Company, this is to confirm that the Company is
responsible for the accuracy and adequacy of the disclosure in the filings. I
personally review all filings before they are submitted and work closely with
the Company's legal counsel and auditor.
I acknowledge that staff comments or changes to disclosure in response to
staff comments do not foreclose the Securities and Exchange Commission from
taking any action with respect to the filings and that the Company may not
assert staff comments as a defense in any proceeding initiated by the Commission
or any person under the federal securities laws of the United States.
I am also aware that the Division of Enforcement has access to all
information we provide to the staff of the Division of Corporation Finance in
your review of our filings or in response to your comments on our filings.
Sincerely,
/s/ Peter F. Russo
Peter F. Russo
President
Delta Mutual, Inc.
DELTA MUTUAL, INC.
111 North Branch Street
Sellersville, PA 18960
January 27, 2006
Mr. Jorge Bonilla
United States Securities and Exchange Commission
450 Fifth Street, N. W.
Washington, DC 20549
RE: Delta Mutual, Inc.
Form 10-KSB for the year ended December 31, 2004
Forms 10-QSB for the quarters ended March 31, 2005 and June 30, 2005
File No. 000-30563
Form 10-KSB
Balance Sheet, page F-2
SEC COMMENT #1: We have read and considered your response to comment one. We
noted that the pre-acquisition costs of $170K is in connection with the
acquisition and proposed development of approximately 270 low income homes that
are designated as Section 124 eligible in the city of Aguadilla, Puerto Rico. In
capitalizing these pre-acquisition costs, tell us how you determined that the
acquisition and development of the property was probable given the fact that on
June 28, 2005 and September 2005 the Planning Board of Puerto Rico did not
approve the Section 124 project in Aguadilla, Puerto Rico. Refer to SFAS 67
paragraph 4 and 5.
COMPANY RESPONSE: For the year ended December 31, 2004, the Company accounted
for pre-acquisition costs of $170K in accordance with Financial Accounting
Standards Board Statement No.67 ("Accounting for Costs and Initial Rented
Operations of Real Estate Property"). As of December 31, 2004, the acquisition
and development of the property was probable based on the information available.
During 2005 the project was not approved by the Planning Board but was subject
to further review by an appellate administrative agency. As of the filing date
of the quarterly report for the period ending September 30, 2005, the Company
believed the acquisition and development of the property was probable based on
the additional information submitted with its administrative appeal to the
Tribunal de Circuito de Apelaciones (Appellate Tribunal) on October 21, 2005.
Prior to the filing of the Company's 10-KSB for the year ending December 31,
2005, the Company will evaluate the facts and circumstances and determine the
probability of the proposed project.
Note 1 - Description of Business and Summary of Significant Accounting Policies
Evaluation of Long-Lived Assets, page F-11
SEC COMMENT #2: We have read and considered your response to comment two. You
indicate in your letter that you test long-lived assets for impairment based on
the estimated undiscounted cash flows. However, note 1 indicates that an
impairment loss would be charged if the carrying value of the long-lived assets
exceeds the present value of the related estimated future cash flows. In future
filings, please indicate that, as we assume, you test long-lived assets for
impairment based on the undiscounted cash flows as oppose to the present value.
Advise us if you plan to expand your disclosure in future filings.
COMPANY RESPONSE: In future filings the Company will test long-lived assets for
impairment based on the undiscounted cash flows as opposed to present value.
Note 5 - Investment in Joint Ventures, pages F-18 - F-19
SEC COMMENT #3: We have read and considered your response to comment three.
Please explain to us how Delta-Envirotech, Inc. meets the definition of VIE in
paragraph 5 of FIN(R). In addition, please explain to us how you concluded you
were the primary beneficiary of this entity in accordance with paragraph 14.
COMPANY RESPONSE: Delta-Envirotech, Inc. meets the definition of VIE in
accordance with (a) in paragraph 5 of FIN(R). The total equity investment at
risk is not sufficient to permit the entity to finance its activities without
additional subordinated financial support provided by any parties, including
equity holders.
In accordance with paragraph 14, the Company is the primary beneficiary as it
will absorb a majority of the entity's expected losses.
Note 6 - Convertible Debt, page F-19 - F-20
SEC COMMENT #4: We have read and considered your response to comment four. We
noted that you determined the beneficial conversion feature to be the fair value
of the convertible debt. Tell us how you considered EITF 00-27 as it stipulates
that the EITF 98-5 model should be applied to the amount allocated to the
convertible instrument to determine if the embedded conversion option has an
intrinsic value. EITF 98-5 defines intrinsic value as the difference between the
conversion price and the fair value of the stock into which the security in
convertible, multiplied by the number of shares into which the security in
convertible. Also, disclose the amortization period of the intrinsic value of
the beneficial conversion feature and refer us to the GAAP literature that
supports this policy.
COMPANY RESPONSE: In accordance with EITF 00-27, paragraph 5, the Task Force
reached a consensus that the effective conversion price based on the proceeds
received for or allocated to the convertible instrument should be used to
compute the intrinsic value, if any, of the embedded conversion option. As a
result of this consensus, an issuer should first allocate the proceeds received
in a financing transaction that includes a convertible instrument to the
convertible instrument and any other detachable instruments included in the
exchange (such as detachable warrants) on a relative fair value basis. Then, the
Issue 98-5 model should be applied to the amount allocated to the convertible
instrument, and an effective conversion price should be calculated and used to
measure the intrinsic value, if any, of the embedded conversion option.
The Company performed the calculations of allocating the proceeds from the
issuance of convertible debt with detachable warrants to each respective
security based upon their relative fair values in accordance with Issue 98-5
model. The Company calculated the conversion value for each debenture and
determined the excess conversion value versus the allocated proceeds.
Convertible debt in the amount of $517,400 was issued without detachable
warrants. The excess conversion value versus allocated proceeds was $2,216,864.
The proceeds of $517,400 were allocated to the beneficial conversion feature and
recorded in paid in capital in the consolidated balance sheet.
Convertible debt in the amount of $444,000 was issued with detachable warrants.
The excess conversion value versus allocated proceeds was $1,684,495. In
accordance with Issue 98-5 model, the Company calculated the estimated
conversion options. (The calculation is attached to this response letter). The
intrinsic value of the conversion warrants of $235,545 is recognized as a
reduction to the carrying amount of the convertible debt and an addition to paid
in capital.
The balance of the proceeds of $208,000 was allocated to the beneficial
conversion feature and recorded in paid in capital in the consolidated balance
sheet.
In accordance with APB 21, the Company used the interest method for the
amortization period of the beneficial conversion feature over the life of the
convertible debt.
SEC COMMENT #5: Please provide a detailed analysis of how you evaluated the
embedded conversion option of the 6% Convertible Note, related warrants and
additional investment rights under EITF 00-19.
COMPANY RESPONSE: Attached to this response letter is a computation and
evaluation of the embedded conversion option of the notes and the related
warrants. Under the provision of EITF 00-19, the Company has the ability to
issue the required number of authorized shares to be settled upon the conversion
of the convertible notes and detachable warrants. The Company has 100,000,000
shares authorized of which over 36,000,000 are currently outstanding. If all the
convertible notes and warrants, at December 31, 2004, were converted into common
shares the total shares converted would be 22,033,200. The Company therefore
would not be required to classify the convertible debt as a liability as the
Company is in control of the settlement of shares. As of September 30, 2005, the
outstanding convertible notes and warrants were convertible into 17,683,200
common shares.
SEC COMMENT #6: Please explain to us and quantify the effect that would result
from your revision of your financial statements and why you have not filed a
Form 8-K regarding this error.
COMPANY RESPONSE: The quantification of the effect of the revision of the
financial statement is as follows:
On July 21, 2005, the Company's board of directors concluded that, upon advice
from its independent auditor, the consolidated financial statements for the year
ended December 31, 2004, as issued in the Company's annual report on Form
10-KSB, and the unaudited consolidated financial statements for the three months
ended March 31, 2005, as issued in its quarterly report on Form 10-QSB, required
restatement because of an error in the calculation of allocation of proceeds to
warrants and the beneficial conversion feature of convertible debt. The error
was corrected by allocating the proceeds to the warrants and beneficial
conversion feature of convertible debt; and not to convertible debt. There was
also an adjustment to the valuation of the issued warrants.
The Company has subsequently filed a Form 8-K reporting the revision of its
consolidated financial statements with respect to the reclassification of its
convertible debt as described in the preceding paragraph, which form included
the following tables as exhibits.
The following table shows the effect of the restatement of the consolidated
Statements of Operations for the year ended December 31, 2004.
Year Ended
December 31, 2004
--------------------------------
Original
Filing Restated
-------------- --------------
Revenue $ -- $ --
Costs and expenses:
General and administrative 1,848,078 1,848,078
Compensatory element of warrants 2,112,500 --
-------------- --------------
3,960,578 1,848,078
Loss from operations (3,960,578) (1,848,078)
Accretion of convertible debt -- (142,200)
Writedown/loss for joint ventures (33,799) (33,799)
Interest expense (27,966) (27,966)
-------------- --------------
Loss before minority interest and
benefit from income taxes (4,022,343) (2,052,043)
Minority interest share of loss of
consolidated subsidiaries 101,644 101,644
-------------- --------------
Loss before benefit from income taxes (3,920,699) (1,950,399)
Benefit from income taxes -- --
-------------- --------------
Net loss $ (3,920,699) $ (1,950,399)
============== ==============
Loss per common share -
basic and diluted $ (0.28) $ (0.14)
============== ==============
Weighted average number of
common shares outstanding 14,250,963 14,250,963
============== ==============
The following table shows the effect of the restatement on the consolidated
Balance Sheets as of December 31, 2004.
December 31, 2004
--------------------------------
Original
Filing Restated
-------------- --------------
Total Assets $ 441,444 $ 441,444
============== ==============
Current liabilities 629,066 629,066
Long-term liabilities 891,400 142,200
Minority interest in
consolidated subsidiaries 183,160 183,160
Stockholders' Deficiency (1,262,182) (512,982)
-------------- --------------
Total Liabilities and
Stockholders' Deficiency $ 441,444 $ 441,444
============== ==============
The following table shows the effect of the restatement on the consolidated
Statements of Cash Flows for the year ended December 31, 2004.
Year Ended
December 31, 2004
--------------------------------
Original
Filing Restated
-------------- --------------
Cash flows from operating activities:
Net loss $ (3,920,699) $ (1,950,399)
Adjustments to reconcile net loss
to net cash in operating activities:
Depreciation and amortization 2,137 2,137
Non cash compensation 528,215 528,215
Compensating elements of
warrant issue 2,112,500 --
Accretion of convertible debt -- 142,200
Issuance of common stock awards 52,000 52,000
Bad debt 47,521 47,521
Writedown/loss from joint ventures 33,799 33,799
Minority interest in losses of
consolidated subsidiaries (101,644) (101,644)
Changes in operating assests and
liabilities (106,253) (106,253)
-------------- --------------
Net cash used in operating activities (1,352,424) (1,352,424)
Net cash used in investing activities (3,793) (3,793)
Net cash provided by financing activities 1,455,940 1,455,940
-------------- --------------
Net increase in cash 99,723 99,723
Cash - Beginning of period 14,057 14,057
-------------- --------------
Cash - End of period $ 113,780 $ 113,780
============== ==============
SEC COMMENT #7: In light of the above error, please tell us if your certifying
officers have reconsidered its effect on the adequacy of your disclosure
controls and procedures as of the end of the periods covered by your Forms
10-QSB Form 10-KSB for the periods affected by the above transactions.
COMPANY RESPONSE: The Company's certifying officers believe the Company's
disclosure controls and procedures as of the end of the periods covered in the
Company's Form 10-QSB and Form 10-KSB for the periods affected by the above
transactions were adequate. When the Company's independent auditors revisited
the topic of the imbedded beneficial conversion option within the convertible
debt, the Company's Board recognized the error and took steps to correct and
restate the financial statements in a timely manner.
Should there be any other questions or comments, please contact me at (215)
258-2800.
Sincerely,
/s/ Peter F. Russo
Peter F. Russo
President
Delta Mutual, Inc.
Attachment to Company Response to SEC Comments #4 and #5
Jan 27 2006
Quoted Excess
Stock Price Conversion Allocation Allocation
Issuance Face/ Conversion or BS Convertible Conversion Alloc Vs Proceeds Proceeds
date Proceeds Price Calculation Into shares Value Proceeds Bene Conv Warrants
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible
Debt 05/12/04 $ 129,160 $0.125 $ 0.52 1,033,280 $ 537,306 $ 408,146 $ 129,160
05/12/04 $ 193,740 $0.125 $ 0.52 1,549,920 $ 805,958 $ 612,218 $ 193,740
07/01/04 $ 157,000 $ 0.05 $ 0.40 3,140,000 $ 1,256,000 $ 1,099,000 $ 157,000
07/16/04 $ 37,500 $ 0.05 $ 0.18 750,000 $ 135,000 $ 97,500 $ 37,500
09/20/04 $ 331,500 $ 0.05 $ 0.19 6,630,000 $ 1,235,400 $ 1,083,247 $ 152,153 $ 179,347
10/19/04 $ 25,000 $ 0.05 $ 0.26 500,000 $ 130,000 $ 116,724 $ 13,276 $ 11,724
11/02/04 $ 12,500 $ 0.05 $ 0.25 250,000 $ 62,500 $ 56,245 $ 6,255 $ 6,245
11/05/04 $ 25,000 $ 0.05 $ 0.23 500,000 $ 115,000 $ 103,251 $ 11,749 $ 13,251
11/26/04 $ 50,000 $ 0.05 $ 0.35 1,000,000 $ 350,000 $ 324,979 $ 25,021 $ 24,979
------------ ------------ ------------ ------------
Total $ 961,400 $ 3,901,309 $ 725,855 $ 235,545
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Warrants 09/20/04 $ 0.25 6,630,000 $ 1,456,200 =$331500*1456200/(1456200+1235400=2691600)
10/19/04 $ 0.26 500,000 $ 114,800 =25000*114800/(114800+130000=244800)
11/02/04 $ 0.25 250,000 $ 62,400 =12500*62400/(62400+62500)
11/05/04 $ 0.23 500,000 $ 129,700 =25000*129700/(129700+115000=244700)
11/26/04 $ 0.35 1,000,000 $ 349,400 =50000*349400/(349400+350000=699400)
24,233,200
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